European Central Bank
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The European Central Bank (ECB) is one of the world's most important central banks, responsible for monetary policy covering the 15 member countries of the Eurozone. It was established by the European Union (EU) in 1998 with its headquarters in Frankfurt, Germany.
The predecessor to the ECB was the European Monetary Institute (EMI). It was established at the start of the second stage of the EU's Economic and Monetary Union (EMU) to handle the transitional issues of states adopting the euro and prepare for the creation of the ECB and European System of Central Banks (ESCB). The EMI itself took over from the earlier European Monetary Co-operation Fund (EMCF). The ECB formally replaced the EMI on 1 June 1998 by virtue of the Maastricht Treaty, however it did not exercise its full powers until the introduction of the euro on 1 January 1999, signalling the third stage of EMU. The bank was the final institution needed for EMU, as outlined by the EMU reports of Pierre Werner and President Jacques Delors. According to the ECB website, it was established on 1 June 1998. The first President of the Bank was Wim Duisenberg, the former president of De Nederlandsche Bank, who was succeeded in November 2003 by Jean-Claude Trichet, former head of Banque de France. Duisenberg had been the head of the EMI (taking over from Alexandre Lamfalussy of Belgium). However the French government wished Trichet to be the first ECB president, stating that as Germany had the seat of the ECB then the Presidency should fall to France. This was opposed by the German, Dutch and Belgian governments who saw Duisenberg as a guarantor of a strong euro. Tensions were abated by an unwritten agreement in which Duisenberg would stand down before the end of his mandate and be replaced by Trichet. The remaining members of the executive board also had tension with the United Kingdom, that demanded a seat even though it had not joined the eurozone. Under pressure from France three seats were assigned to the largest members, France, Germany and Italy. Spain demanded and was awarded the same treatment with the final seat going to Finland. Despite such a system of appointment the board asserted its independence early on in resisting calls for interest rates and future candidates to it. When the ECB was created, it covered a Eurozone of eleven members, since then Greece joined in January 2001, Slovenia in January 2007, and Cyprus and Malta in January 2008, enlarging the bank's scope and the membership of its Governing Council.
Powers and objectives
The ECB has the exclusive right to authorise issuance of banknotes The ECB has the exclusive right to set interest rates for the Eurozone. The primary objective of the ECB and the ESCB is "to maintain price stability" within the Eurozone, in other words to keep inflation low. The present target is to keep inflation below, but close to, 2%. Second to this objective, the key tasks of the ECB and ESCB are to define and implement the monetary policy for the eurozone, support the economic policies of the member states, conduct foreign exchange operations (and take care of the foreign reserves of the ESCB) and promote smooth operation of the banking payment system. Finally, the ESCB also acts according to a market economy with free competition, but the objective of price stability prevails over all others. Furthermore, in this it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins). The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it is responsible for maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it injected billions of euros to stabilise the financial system. In December 2007 the ECB decided in conjunction with the Federal Reserve under a program called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market. In particular, the monetary functions involve: the opening of accounts for credit institutions, public entities and other market entities; open market and credit operations; requiring credit institutions to hold minimum reserves, regulating to create an efficient and sound clearing and payments system; and co-operating with third country central banks, credit institutions and international organizations.
Jean-Claude Trichet, the current President The design of the ECB was modelled on the German Bundesbank, in particular on its political independence. It is governed by a Governing Council and the Executive Board. There is also a General Council. The bank has independence from any European or national institution and also holds financial independence by means of a separate budget drawn from national central banks. These bodies also govern the ESCB, which is the ECB plus all the NCBs of the EU (the "Eurosystem" is the ECB plus the NCBs inside the Eurozone).
The Governing Council is the supreme decision making body of the ECB. It is composed of the members of the executive board and the governors of the NCBs which have adopted the euro. The Council is responsible for taking decisions on monetary policy, interest rates and the reserves of the ESCB. It's also responsible in other matters, such as authorises the issue of banknotes and in advising other institutions on draft legislation. It meets at least ten times a year and meetings can only be attended by members and the Council President and Commission President. In voting each member has one vote (the Council and Commission presidents do not vote) and decisions are taken by a simple majority. They don't represent their countries,they represent the interest of the eurozone, in a similar manner as the commissioners, who represent the interests of the EU and not their country of origin. The Executive Board is responsible for the implementation of monetary policy defined by the Governing Council and the day-to-day running of the bank. In this it issues decisions to NCBs and may also exercise powers delegated to it by the Governing Council. It is composed of the President of the Bank (currently Jean-Claude Trichet), a vice president and four other members. They are all appointed by common accord of the eurozone governments for a non-renewable eight year term.By a tacit understanding arrived at in 2005, four of these six seats are currently reserved for the Eurozone's four big central banks of France, Germany, Italy and Spain. The General Council is a body dealing with transitional issues of euro adoption, for example fixing the exchange rates of currencies being replaced by the euro, (continuing the tasks of the former EMI). It exists until all states adopt the euro, at which point it would be dissolved. It is composed of the President and vice president together with the governors of all the NCBs of the EU.
Independence and future
The ECB is designed to be independent of political intervention, both from EU institutions and from member states. It also has financial independence by virtue of its having its own budget, separate from the EU budget, sourced from the NCBs. Its political independence was an attribute taken from the bank it was modelled after, the German Bundesbank, due to a consensus amongst economists that an independent central bank is the best way to avoid manipulation of the macroeconomy for political purposes. Furthermore, not only must the bank not seek influence, but EU institutions and national governments are bound by the treaties to respect this principle by not themselves seeking to influence the decision-making bodies of the ECB. This is also aided by the members of the bodies having security of tenure. For example, the minimum term of office for an NCB governor is five years and members of the executive board have a non-renewable eight-year term. To offer some accountability, the ECB is bound to publish reports on its activities and has to address its annual report to the European Parliament, the European Commission, the Council of the European Union and the European Council. The European Parliament also gets to question and then issue its opinion on candidates to the executive board.
However, the policy of independence has come under some criticism. In 2001, a UK treasury official argued that problems could be caused by the ECB setting its own interest rates due to concern about disagreement between the 12 finance ministers. In comparison, in the UK system the inflation target is set by the government and the interest rates are set by the Bank of England. Despite the ECB controlling monetary policy, economic policy remains national and hence some were of the opinion that there was an insufficient counterbalance to the ECB (such as an EU Treasury). They therefore proposed an economic government for the Eurozone as the Ecofin, the nearest comparison, represented all the EU rather than just the Eurozone. Concerns over how any such body would affect the independence of the ECB led to the watered-down proposal of an "Ecofin Council" to discuss such matters. The bank's independence has notably come under intense criticism since the election of Nicolas Sarkozy as French President. Sarkozy has sought to make the ECB more susceptible to political influence, to extend its mandate to focus on growth and job creation, and has frequently criticised the bank's policies on interest rates and over its handling of the 2007 credit crisis. In response, Trichet and national leaders warned Sarkozy of undermining the principle of independence. Concerns have also been raised over the Lisbon Treaty which, like the European Constitution, will make the ECB a formal institution of the EU and which does include contrary to what is often said - an article ensuring the bank's independence (article 282 (3) TFEU). Trichet has expressed that without such a guarantee the bank would be bound by the same code as the other institutions, to cooperate and pursue a common agenda. This may encourage leaders to put political pressure on the bank's decisions.
The bank is based in Frankfurt, the largest financial centre in the Eurozone. Its location in the city is fixed by the Amsterdam Treaty along with other major institutions. In the city, the bank currently occupies Frankfurt's Eurotower until its purpose-built headquarters are built. In 1999 an international architectural competition was launched by the bank to design a new building. It was won by a Vienna-based architectural office called Coop Himmelbau. The building will be approximately 180 metres (591 ft) tall (the present building is 148 m/486 ft) and will be accompanied by other secondary buildings on a landscaped site on the site of the former wholesale market (Grossmarkthalle) in the eastern part of Frankfurt am Main. The main construction work will commence in October 2008, with completion scheduled for before the end of 2011. It is expected that the building will become an architectural symbol for Europe and is designed to cope with double the number of staff who operate in the Eurotower.